Public Pension Solvency Requires Asset Bubbles

The title of this post expresses what is probably the greatest example of a monstrous hypocrisy – that public employee unions, and the pension funds they control, are supposedly helping the American economy, and protecting the American people from “the bankers.” Overpriced “bubble” assets caused by banks offering low interest rates hurt ordinary working people in two ways – they cannot afford to buy homes, and they are denied any sort of viable low risk investment opportunity. But without an endlessly appreciating asset bubble, every public employee pension fund in the United States would go broke.

The inspiration for this post is a guest column published on April 27th in the Huffington Post entitled “The Real Retirement Crisis,” authored by Randi Weingarten, the president of the American Federation of Teachers. The totality of Weingarten’s column, a depressing plethora of misleading statistics and questionable assertions, compels a response:

Weingarten writes: “America has a retirement crisis, but it’s not what some people want you to believe it is. It’s not the defined benefit pension plans that public employees pay into over a lifetime of work, which provide retirees an average of $23,400 annually…”

Here we go again. This claim is one of the biggest distortions coming out of the public sector union PR machine, and despite repeated clarification even in the mainstream press, they keep using it, faithfully counting on low-information voters to believe them. “An average of $23,400 annually.” Not in California. In the golden state, public employee pensions [...] Read More

Construction Unions Should Fight for Infrastructure that Helps the Economy

One primary reason California has the highest cost-of-living (and cost of doing business) in America, combined with a crumbling infrastructure, is because California’s construction unions have allied themselves with environmental extremists and crony “green” capitalists, instead of fighting for what might actually help their state.

California’s construction unions ought to take a look around the rest of the country, where thousands of jobs are being created in the energy industries – really good jobs – doing something that actually helps ordinary people. Because the natural gas revolution unleashed in North Dakota, Texas, Wyoming, Colorado, Utah, New Mexico, Pennsylvania, West Virginia, and Ohio is creating thousands of jobs in those states at the same time as it lowers the cost of energy for consumers who struggle to make ends meet.

More generally, construction unions should remember that it is not only how much their own members earn that matters, but how much things cost everyone. If things cost less, you can make less yet enjoy the same standard of living. When unions fight for high paying jobs on projects that are useless, they only help themselves. When they fight for projects – such as natural gas development – that lower the cost of energy, they are helping everyone.

The California Public Policy Center released a new study this week entitled “The Benefits and Costs of Oil and Gas Development in California,” written by Dr. Tim Considine, an energy economist with the University of Wyoming. In the study, Considine estimates [...] Read More

Pension Funds and the “Asset” Economy

“You can’t build a society on artificially inflated asset values, because that accelerates the class division. Immigrants know that even if they work in a low-paying job in a hotel in Houston the chances they can save and buy a house are infinitely better than in California. If you want to have an asset based economy then accept we’re going to have feudalism because the price of entry is just too high.” – Joel Kotkin, CPC Interview, January 4, 2014

What Kotkin is referring to is the result of decades of increasing legislative restrictions on cost-effective land and energy development, combined with Federal Reserve policies designed to minimize the cost of borrowing. In the first case, prices for land and energy, the building blocks of a healthy economy, are artificially inflated through constraints on supply. In the second, the supply of borrowed money is artificially increased via ultra-low interest rates.

This so-called “asset economy” might also be called a “bubble economy,” because it cannot be sustained indefinitely. For a while, inflated values of real estate, privately owned natural resources and business inventories provide collateral for additional borrowing at low interest rates, which puts even more money into circulation, bidding the price of assets up even further. Meanwhile, environmentalist legislation of increasing severity continues to restrict supplies of land and energy, driving prices of marketable land and energy higher still. And the bubble grows.

This is the real reason California is unaffordable for working families. Anywhere within 100 miles [...] Read More

Bipartisan Solutions for California

When examining policy options that might help restore a financially sustainable public sector, reformers tend to focus on what may be politely referred to as austerity programs. And no effective package of reforms can ignore austerity measures; cutting government programs, cutting government staff, and cutting government employee compensation. At the same time, an essential element in such an austerity program would be new rules to change the political landscape – in particular, legislation to curb the power of public sector unions whose agenda intrinsically favors bigger government.

Focusing on austerity alone, however, not only condemns many useful government programs and virtually all government workers to an unpalatable fate, but it is insufficient to revitalize overall economic growth. Accompanying any package of austerity measures must be a package of prosperity oriented measures. These include, predictably, creating a more business-friendly regulatory environment. But they also should include public/private infrastructure projects, strict new laws designed to break up monopolies and promote competition among very large corporations, and a relaxed permitting process for land, energy and resource development. All of these prosperity measures must share a common priority – to lower the cost of living. This not only makes austerity measures affordable, but it frees up public capital to reduce debt and make smart infrastructure investments, and it frees up private capital to innovate and invest in entirely new industries.

Here, in more detail, are solutions for California that combine both austerity and prosperity:

(1) Balance State and Local Government Budgets:

(a) Lower the [...] Read More

Solutions for California

When Governor Jerry Brown, back in the 1970′s, suggested that California should have its own aerospace program, he was dubbed “Governor Moonbeam,” and the moniker has stuck to this day. That’s too bad, because at the time Gov. Brown made that statement, California had the most robust aerospace infrastructure in the U.S. The nexus of companies in Los Angeles – Northrop, Hughes, Rockwell, TRW, plus the branches of dozens of others – the launch complex at Vandenberg, the vast resources of land in the Mojave including Edwards AFB – made California a natural location to further America’s space efforts.

Today half of the companies noted above have been driven out of California by over-regulation, and instead of talking about mining the asteroids, Jerry Brown is talking about a bullet train to nowhere. Before you laugh at the Gov. Moonbeam’s original idea, consider California-based entrepreneur Elon Musk, founder of SpaceX. This private aerospace company, which is already supplying launch vehicles to NASA, has just announced that their “Falcon Heavy,” the largest launch vehicle since the Saturn V moon rocket, will be tested later this year.

The asteroids will be explored and mined by robotic spacecraft within a few decades. And much of the ingenuity and entrepreneurship, risk capital, and high technology will be coming from California. Imagine if California’s dawning recapture of the lead in aerospace technology, following her existing lead in biotech and info-tech, were encouraged by California’s laws and regulations instead of occurring in spite of them?

There are [...] Read More

China’s Economy is About to Crash

Close attention has been paid to the fragmenting Eurozone, where social benefits funded by debt accumulation are bankrupting the entire aging continent. Less attention has been paid to China, where debt accumulation has financed not social benefits, but massive construction projects.

Financial strength is always ultimately found on the balance sheet of a nation, not the income statement. A nation with high GDP, i.e., strong revenues, may be funding that growth through massive borrowing. As the income statement racks up a string of impressive performances, the balance sheet may be steadily worsening.

Nearly two years ago, in “The China Bubble,” I pointed out numerous examples of asset inflation, primarily in real estate, that had already been going on for over a decade in China. Just like in the United States, these over-valued assets have been used as collateral to fund economic expansion. And just like in the United States, eventually people in China will stop buying over-valued assets and their price plummets. This is happening now in China.

One of the best economics blogs out there is “Global Economic Analysis” by Mike Shedlock. His recent post entitled “Real Estate Crash in China Underway: Foreign Funding Down 80%, Land Sales Down 57%, Starts Down 27%; Expect Chinese GDP to Plunge,” says it all. In his post, Shedlock references a report entitled “China Real Estate Unravels” by Patrick Chovanec, a professor at Tsinghua University’s School of Economics [...] Read More

California’s Government Worker Pensions Are Bankrupt

As reported today in Capitol Weekly, in a post entitled “CalPERS ignores Brown, delays pension payment” by Ed Mendel, the amount taxpayers will have to fork over to CalPERS next year will rise by $213 million, to a total of $3.7 billion. Governor Brown, quite rightly, believes the full amount of the necessary increase should have been assessed, another $149 million, instead of being “smoothed” over the next twenty years.

But CalPERS – the largest of over 30 major government worker pension funds in California, only manages about a third of the the state and local public sector pensions. And CalPERS is basing their increase on a lowering of their projected rate of return for their invested funds by one quarter of one percent, from 7.75% down to 7.5%.

People may debate endlessly over whether or not government worker pension funds in America, now managing over $4.0 trillion in assets, can actually earn 7.5% per year, every year, for decades on end. We have argued repeatedly that this rate of return is impossible to achieve any longer, because (1) high returns in the past depended on debt accumulation, which poured cash into the economy, which stimulated consumer spending, investing, and asset appreciation – enabling more borrowing – all of which caused investment returns to grow at levels that cannot continue now that borrowing has reached its practical limit, (2) our aging population means more people will be selling their investments to finance their retirements – including the pension [...] Read More

How Construction Worker Unions Can Save California

The California Labor Federation has a membership of more than 1,200 unions, representing over two million workers. And the first of seven key issues they list on their legislative agenda for 2012 is supporting high speed rail. As they put it, “Building high speed rail will grow our economy and create long-term jobs. An estimated 450,000 jobs in operations, maintenance, ticketing, and services will be needed to keep HSR up and running.”

It is difficult to imagine economic thinking more well intentioned yet fundamentally flawed. What private sector unions want, ideally, is to work cooperatively with government and industry to help create well paying jobs. But high speed rail will incur far more economic costs than economic benefits. Massive construction projects, using public/private financing mechanisms, have to benefit the economy. Otherwise they are examples of private gain – high paying jobs for workers who happen to belong to unions involved in the construction and maintenance of the project – in exchange for socialized loss – higher taxes that lower the disposable income of everyone else.

Policy activists who are critical of unions must understand that there are two crucial debates they are engaged in with unions. The first one is an economic argument – convincing union leadership that encouraging free market competition will lower the cost of living for everyone, and that when this happens all workers benefit. This is a tough sell, despite being entirely accurate. But the second debate, which regards what projects unions should be [...] Read More

Social Security Isn’t Insolvent, Public Pensions Are

In the March 19th, 2012 issue of the New Yorker magazine, as part of a full-page advertisement for MSNBC, there is a quote from Rachel Maddow that I couldn’t agree with more. She says:

“Social security isn’t a Ponzi scheme. It’s not bankrupting us. It’s not an outrage. It is working.”

Rachel Maddow is absolutely right. In one of several attempts to compare the costs, benefits, and solvency of social security to public sector pensions, in the post from November 2011 entitled “Merge Social Security and Public Sector Pensions,” I concluded the following:

“If one strips away the reliance on investment returns and compares social security to public sector pensions based on payroll withholding from current worker’s providing 100% of the funds required to make current payments to retirees, it quickly becomes obvious that public sector pensions are completely unsustainable, whereas social security can be rendered permanently solvent with relatively minor tinkering.”

The reason for this is simple enough: Social security, on average, collects about 12.5% of someone’s annual earnings for about 40 years, then when that someone retires in their mid-sixties, it pays back about 33% of those earnings for about 15 years. Public sector pensions, by contrast, on average collect not quite 20% of a government worker’s annual earnings for about 30 years, then when that government worker retires in their mid-fifties, it pays back about 75% of those earnings for about 25 years. Do the math.

Compared to public sector pensions, along with having far [...] Read More

Senator DeLeon’s Universal Retirement Security Act

The challenge of providing retirement security to all citizens is the broader issue behind the debate over what level of public sector pension benefits are both equitable and financially sustainable. California Senator Kevin De Leon’s proposed legislation, SB 1234, will hopefully further this debate.

As reported in the Sacramento Bee by Jon Ortiz on February 24th “California Democrats push pension plan for nongovernment workers,” and in the Los Angeles Times by Mark Lifsher on February 23rd, “Private-sector retirement savings plan proposed for California,” DeLeon’s bill will require every employer in the state with five or more employees to participate in the plan. If employers already offer a pension plan or 401K plan, they would be exempt.

Plenty of commentators have already weighed in with sobering missives on the many problems with DeLeon’s bill. You can read them in the San Bernardino Press Enterprise, the Pleasanton Weekly, CalWatchdog, CalWhine, and elsewhere. But when DeLeon says his bill “is designed to supplement Social Security retirement benefits,” he is on to something bigger than he may realize.

The goal of taxpayer funded retirement security, whether it is for a retired government worker or a retired private sector worker living on social security, is not to support an affluent lifestyle. A taxpayer funded retirement pension should be a modest amount, better than social security – but not some huge amount that enables an affluent lifestyle. To have an affluent lifestyle [...] Read More